In this revised and updated third edition, Carver continues to debunk the entrenched beliefs and habits that hobble boards and to replace them with his innovative approach to effective governance. This proven model offers an empowering and fundamental redesign of the board role and emphasizes values, vision, empowerment of both the board and staff, and strategic ability to lead leaders. Read More

In the second edition of this best-selling Policy Governance operating manual, John Carver and Miriam Carver make this exciting approach to effective governance even more accessible and user-friendly, gleaning lessons learned in years of practice to help readers understand and use this invaluable model. Read More

Democracy, in modern times, has become synonymous with elections.
This was not always the case. In ancient Athens, and for almost two
thousand years afterwards, it was synonymous with random selection, or sortition.
Modern experiments with new ways of doing democracy, from Policy Juries
to Citizens’ Assemblies to Constitutional Councils are harking back to
the days of ancient Athens and sortition is undergoing a revival of use
and an explosion of interest.

Together with guardianship this gives three principal ways of selecting those who govern:

Election

Random selection (sortition)

Guardianship (or meritocracy)

What are the pros and cons of these differing selection methods?
What are their histories? Where do they derive their legitimacy from,
and what might boards learn from understanding the differences? These
are some of the questions addressed below.

The political appeal of sortition was so obvious, to ancient Greek
men at least, that it was by far their most commonly used process for
allocating political posts. While the ancient Athenian assemblies are
surely the most famous of early legislatures, it is less well known that
the proposals for debate were usually developed by a randomly selected
Council of Five Hundred (the boule), each of whom served office for one year only.

An extensive system to fill the vast majority of the public
offices used the drawing of lots and strictly limited terms of office to
decide who was to be a magistrate, who was to serve on the courts and
in the boule. Election was reserved for those few positions where
narrow, specialist skills were deemed necessary, such as heads of
finance and military leaders.

Key thinkers, from Aristotle (384–322 BC) all the way to Rousseau
(1712-1778 AD) and Montesquieu (1689–1755 AD), consistently linked
democratic government with selection by lot, and aristocratic government
with selection through election. Aristotle, in Politics, states
“it is thought to be democratic for the offices [of constitutional
government] to be assigned by lot, for them to be elected oligarchic.”
From Montesquieu we have: “Selection by lot is in the nature of
democracy, selection by choice is in the nature of aristocracy,” and
from Rousseau: “it will be seen why the drawing of lots is more in the
nature of democracy. . . . In an aristocracy . . . voting is
appropriate.”1 It was well understood that elections are aristocratic devices; elite and elect, after all, share the same etymological root.

Which perhaps explains the current malaise suffered by electoral
democracy, with populist parties denouncing government as rule by elites
thriving at both ends of the political spectrum.

This populism reflects an all-too-apparent general disaffection
with, and cynicism toward, the modern representative system and its
politicians. In survey after survey, politicians invariably rank among
the least trustworthy and most dishonest of professions, along with car
salesmen and real estate agents. Voter exit polls in 2014 in the United
States found that “about 8 in 10 Americans disapprove of how Congress is
handling its job.”2 Compared to the 1950s, membership of
political parties has plummeted in most democratic states, and election
turnout has, in general, also declined. This leaves the machinations of
state to a small class of politicians, journalists, and lobbyists, who,
at least until the rise of social media in the last decade, pandered to
traditional media conglomerates as the best way to access and influence
potential voters.

Somewhat paradoxically, this retreat of ordinary people from
formal politics has made it even harder for politicians to make
difficult decisions. Reduced public participation increases the sphere
of influence of special interest groups, corporations and their paid
lobbyists, the mainstream media, and the hard core of highly ideological
party activists who determine which candidates can stand through their
domination of preselection procedures. This capture of the political
process derails any genuine attempt to tackle the problems, especially
if they conflict with corporate, donor, or key-faction party interests.

Nevertheless, electoral democracy today has triumphed in
approximately half of the world’s nation-states. Elections are one of
the modern answers to the ancient question of how to govern. The other
common global alternative is some form of authoritarian guardianship.

According to Robert Dahl, the doyen of democracy studies in the United States:

The claim that government should be turned over to experts deeply
committed to rule for the general good and superior to others in their
knowledge of the means to achieve it—Guardians, Plato called them—has
always been the major rival to democratic ideas. Advocates of
Guardianship attack democracy at a seemingly vulnerable point: they
simply deny that ordinary people are competent to govern themselves.3

Theoretically, supposedly “benign dictatorships” such as those in
China are meant to be meritocratic. However, it is noteworthy that all
these regimes strenuously promote the idea of their own legitimacy,
through a varying combination of bribery, propaganda, censorship, and
oppression. Even in authoritarian regimes it does matter what the people
think: they must be made to understand that the rulers are ruling in
the people’s best interests, even if, according to the New York Times, the Chinese rulers and their families are getting very rich while doing so.4
It is not surprising that Chinese autocracy is looked upon by a number
of states, particularly in the developing world, with admiration.

It is the appeal to a necessary guardianship that authoritarian
regimes such as China use to justify their control and monopoly of
power. If people are too stupid to govern, then perhaps they’re also too
stupid to vote.

Political power in China is supposedly meritocratic, and exams
play a large part in the process. However, meritocracies are well known
to be susceptible to cronyism, nepotism, and corruption. Lyn Carson and
Ron Lubensky highlight how in boardrooms the famous “tap on the
shoulder” is often justified by claims to meritocracy,5 yet
this selection method, obviously reliant on social or professional
networks, will more often than not reduce the diversity of those who
govern and is highly susceptible to accusations of cronyism and
nepotism.

The third selection method, sortition, is currently making a very strong comeback.

Since the 1990s citizens’ summits and participatory governance
structures involving everyday people have spread across the world and
become increasingly common. Politicians and bureaucrats are choosing—or
being forced—to open up the process of decision making whereby ordinary
citizens deliberate political issues that are often complex and
contentious. People are deciding together which issues should get
priority, how government money should be spent, and how best to
implement and monitor laws that affect their communities.

The participatory governance experiments range from the relatively
small-scale examples of municipal participatory budgeting to
large-scale summits such as the British Columbia Citizens’ Assembly on
Electoral Reform in Canada in 2004, an Australian Citizens’ Parliament
in 2009, the Icelandic National Gathering on the Constitution in 2010,
Ireland’s National Citizens’ Assembly in 2011, and Belgium’s G1000
Citizens’ Summit, also held in 2011. These latter assemblies relied on
the legitimacy inherent in using a representative sample of people in an
informed, deliberative process.

To ensure that the randomly selected sample is an accurate
reflection of the community at large, and not, for example,
overpopulated with older, more educated men, the selection is often
stratified: once the number of men in the sample reaches 50 percent of
the total, no more men are invited to participate. The same idea can be
applied to age brackets, income, education level, and so forth.

Random selection increases the perceived legitimacy of such
forums, as it avoids any potential takeover by well-organized special
interests or political lobbies, and the process of stratification avoids
a common problem of voluntary self-selection, whereby a forum
“disproportionately attracts politically active, highly educated,
high-income, and older participants.”

Of these types of forums, policy juries are typically smaller than
deliberative polls, which are usually smaller than assemblies. The aim,
though, is broadly the same: to inform a representative sample of
citizens on certain issues and facilitate deliberation leading to an
understanding of the relative popularity of specific policy options. It
is emphatically not an opinion poll or a referendum. Deliberation
informed by balanced and accurate information are key elements: the
outcome should measure not what people in general do think, but what they would
think, given the time, information, and possibility to argue their
point of view and be affected by the views of others in a facilitated
and fair setting. John Dryzek from the University of Canberra calls this
the “simulation claim”—a mini-public should give “a simulation of what
the population as a whole would decide if everyone were allowed to
deliberate.”6 Deliberation moves beyond public opinion to public judgment.

Random selection has many benefits when compared to elections or
guardianship: for example, you can ensure gender balance, there is no
need to appease donors or party factions, and media-driven popularity is
of no consequence. Of course, it also has drawbacks, although one
notable unfounded criticism is that people are incapable of making
substantive, balanced, and considered judgments. The assemblies
conducted to date show that large numbers of people, combined with good
processes, can produce a surfeit of engaged and thoughtful attendees:
“The most obvious finding from mini-publics relevant to the larger
public sphere is that, given the opportunity, ordinary citizens can make
good deliberators. Moreover, issue complexity is no barrier to the
development and exercise of that competence,” says Dryzek.7

There is also considerable evidence that diversity trumps ability
when solving problems and producing innovative ideas (see, for example,
Scott Page, from the University of Michigan, in The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools and Societies,
2008). So next time your board is looking for a highly legitimate,
inclusive, diverse, and fair way to develop long-term vision, goals, or
strategy, perhaps it will be time to draw a few names out of a hat.

Democracy, in modern times, has become synonymous with elections.
This was not always the case. In ancient Athens, and for almost two
thousand years afterwards, it was synonymous with random selection, or sortition.
Modern experiments with new ways of doing democracy, from Policy Juries
to Citizens’ Assemblies to Constitutional Councils are harking back to
the days of ancient Athens and sortition is undergoing a revival of use
and an explosion of interest.

AS
WITH ANY ORGANIZATIONAL change, strategic implementation is critical to
success. It is also often the most challenging step of the process.
Policy Governance is no exception. To be a success, the Policy
Governance model requires a great deal of bipartisan commitment between
the governing board and chief executive officer (CEO). These essential
participants must begin their Policy Governance journey with an acute
understanding of their roles and responsibilities as defined by the
governance model. However, in our fervency to advance board and CEO
competency, we are inclined to overlook the importance of sustaining the
system through ongoing tactical application and the support required to
manage such systems.

Arriving at Policy Governance

Nearly
twenty years ago, Rockford Park District Commissioner Bruce Atwood
(board member) and a senior administrator simultaneously encountered
John Carver's Policy Governance model. They were both greatly intrigued.
The administrator introduced then CEO (for whom we use the term
Executive Director as seen in policy extracts below) Webbs Norman to
this proposed utopian board-CEO governance paradigm. Shortly after that,
Commissioner Atwood led the board to implement policy governance. If
the model had not been introduced to the board by a peer, at that time
the notion that the board should stay out of operations might have been
laughable, if not irreverent. Moreover, if the CEO had not known of the
model, he may have been suspicious of the board's motives for moving
toward this seemingly somewhat liberal system of accountability.
Instead, because of peer leadership on the part of the board, and
participative management on the part of the CEO, the District pursued
Policy Governance with the counsel of a trained consultant.

Two
decades of courageous leadership and faithful discipline have led to an
organizational culture deeply rooted in Policy Governance today. As
elected officials, the board is focused on governing through policy to
fulfill the purpose of the organization for the benefit of citizens.
Their policies define the results to achieve, prioritize to whom
services are to be provided, direct the allocation of resources, and
establish boundaries of prudence and ethics within which the
organization must operate. The CEO is empowered to achieve the specified
outcomes, with little ambiguity as to his authority or limitations. In
the experience of Rockford Park District, there have been enormous
advantages provided by this clarity, which extends through the CEO into
the ranks of the organization.

Consistent with board policy, the
CEO is the only employee directly accountable to the board. Necessitated
by the sheer size of the organization and motivated by a collaborative
leadership style, the CEO delegates certain functions to staff just as
the board delegates operations to the CEO. The District's CEO relies on a
host of team members to facilitate decisions that impact the
organization and its stakeholders. This approach is exemplified by
Executive Tim Dimke, who “gives managers opportunities to operate
independently while still being dependent on the same value system that
drives the entire organization.”1
This is effective because staff also embrace and understand their
responsibilities as they relate to Policy Governance, ensuring
achievement of priority results (Ends) and compliance with prudential
and ethical boundaries (Management Limitations) throughout the
organization.

It is not surprising that such a participative
leadership style lends itself well to Policy Governance, which itself
emphasizes servant-leadership. While the CEO works on high-level
initiatives and collaborations to move the organization toward
achievement of the vision, mission, and priorities, staff implements
tactics to achieve their corresponding objectives in the operations of
daily programs and services.

Rockford Park District takes a
multifaceted approach to sustaining Policy Governance by engaging all
levels of the organization. The board president serves as the chief
governance officer, assuring the integrity of and adherence to its
governance process policies. The board president and CEO together are
dedicated to maintaining communicative relationships with each of the
board members. This establishes the relational avenue necessary for
discussing Policy Governance roles, responsibilities, and when necessary
dealing with issues of encroachment.

Board Administration

The
board requires in its policies that “the Executive Director shall not
permit the Board to be uninformed or unsupported in its work.” The CEO
interprets good communication as being essential to compliance with this
policy, with the understanding that the District needs a well-informed
and supportive board and that being well informed requires the CEO to
provide thorough, relevant, and timely information necessary for the
board to govern with knowledge, integrity, and assurance.

The
executive director is the main conduit for such communication between
the board and the organization, with essential support provided by a
variety of staff members, especially the recording secretary (clerk),
Policy Governance manager (administrator), and executive leadership
team.

Public relations issues, major projects or decisions,
general updates, meeting calendars, and community engagement commitments
are streamlined as a part of a weekly memo that serves as an official
record of CEO communication to the board. This requires staff to be
alert to information and forward anything to the CEO that may be
strategically or relationally advantageous to share with the board.
Certain subject matters may be elevated to periodic one-on-one meeting
discussions between the CEO and each of the board members, or as formal
board presentations, typically conducted by Executive Team members.
Items that require the formal approval of the board are identified in
governing policies and are preliminarily introduced to the board through
the weekly memo, individual meetings, or full presentations.
Recommendations for board action may be prepared by staff at any level
and advanced through the ranks to the CEO.

A strong board-CEO
relationship is enhanced by a strong team of executive managers. This
team has an acute awareness of the board-established priorities and
limitations as they exercise their responsibilities to advance their
respective divisions of the organization toward achievement of the
priorities in harmony with the whole. Board members gain familiarity
with staff members by participating in staff committees when mutually
agreed upon by the board and CEO. In such instances, Board policy makes
clear that board members shall refrain from attempting to exercise
individual control over the committee or staff. This allows the
organization to capitalize on board member professional expertise,
satisfy board members‘ related personal interests, and maintain peer
accountability for participation with respect to governance.

At
Rockford Park District, while the recording secretary (clerk) supports
the CEO with board meetings, schedules, recommendations, administration,
and records, the Policy Governance manager (administrator) serves at
the will of the CEO as the in-house Policy Governance consultant,
maintaining and aligning the governance and operational leadership
system. The responsibilities include board policy maintenance and
recommendations, including the annual review and approval of all board
policies and regulations. The manager works as part of the executive
team developing the strategic plan and CEO interpretations to align to
board priorities (Ends), and coordinates more than thirty Ends and
Management Limitations monitoring reports yearly. The reporting process
includes input from no less than three other staff members in each
division of the organization, as seen in the swim lane chart provided as
Figure 1.

Figure 1.

As
part of the national accreditation readiness program, the Policy
Governance manager leads a team that maintains an all-inclusive system
to automate and align all operational standards, procedures, and
administrative policies, to the board's governing policies as they are
updated. Comprehensive approaches such as this keep the priorities
(Ends) at the forefront for every employee, enhance compliance with
established limitations, and establish the framework for organizational
culture. A clear target, explicit boundaries, and latitude for
stakeholder input and responsiveness make it simple for staff throughout
the organization to make decisions, achieve milestones, and enjoy their
work. The field of latitude is depicted in Figure 2
as the administrative empowerment zone, a space that cultivates
innovation, growth, responsiveness, culture, and many other
characteristics and activities that define the most notable
organizations—those who also experience few uncalculated laments and
have much to celebrate.

Is
there enough latitude between the goals and the boundaries to empower
your CEO and, therefore, his or her team, to try new approaches to
business?

If the answer is no, this uncertainty comes at a
significant cost to the success, resources, and sustainability of your
organization. Allowing the greatest possible degree of latitude within
safe boundaries will not only improve the alignment of resources to
achieve your organizational goals but also allow the CEO to empower the
entire workforce to serve your customers in new, exciting ways. It all
starts with the board, leading by example with empowering policies in
balance with monitoring and accountability.

1Webbs Norman with Geri Nikolai and Tim Dimke. Building a Lasting Dream: 1909 to 2009, A History of the Rockford Park District (Beloit, WI: Amphitryon, 2011); paperback.

May/June 2016

Rockford Park District in Illinois (United States) operates 177 parks
and facilities. As a major part of her role as Policy Governance and
Community Relations Manager for the District, Julia Steiner Halsted is
responsible for the administration of its use of the Policy Governance®
system. Here, she reflects on what she has learned.

Carsten:
I am an Associate Professor of Law at the London School of Economics
and Political Science who conducted research on corporate governance,
securities regulation, and law and economics and prepared reports on
corporate governance and financial regulation for the European
Commission and the European Parliament. One strand of my research on
corporate law and securities regulation deals with the legal and
nonlegal determinants of regulatory reform, the international diffusion
of legal innovations, and the interrelationship between the regulatory
environment and economic variables. I generally use a comparative and
interdisciplinary approach. My current projects include analyzing the
European Union (EU) harmonization program in company law and capital
markets regulation to facilitate discussions about how regulatory
authority should be allocated between the EU and the Member States to
promote integrated markets and ensure efficient regulatory outcomes. I
am also working on a comprehensive treatise on comparative company law
that examines in-depth some of the main legal traditions of the world,
compares the regulatory strategies employed, and explains the observed
differences in historical perspective.

Caroline: What got you interested in the origins of corporate governance codes?

Carsten:
Having worked on corporate governance for some time and teaching at
LSE, I saw that corporate governance codes are very influential in
creating what is seen as best practice for boards and others involved in
corporate governance. It therefore seemed to me important to analyze
how such codes are developed and lead to the dissemination of new
techniques in regulating corporate governance in a changing political,
economic, and legal environment.

Caroline: How did you go about your research?

Carsten: I analyzed 106 corporate governance codes of 23 European countries and tried to classify them according to:

the
extent to which the drafting committee was dominated by representatives
of the investment community, issuers' representatives, public
regulators, or others. It is important to note that most codes are not
legislative initiatives but private initiatives for example, by stock
exchanges and industry bodies; and

the type of legal framework used by the relevant country.

I then looked at the provisions of the codes and analyzed them according to:

how prescriptive they are, and

whether they strengthen the position of outside investors

… in relation to a number of issues including:

independence,

board and board committee composition, and

separation of the roles of CEO and chairman of the board.

Caroline: What did you find?

Carsten:
Certainly, some codes are more onerous and more prescriptive than
others. For example, some specify the number of nonexecutive versus
executive directors (senior managers) that should be on the board,
whereas other codes use terms such as sufficient nonexecutives, leaving
wide room for interpretation by individual boards. Some codes are clear
that the roles of chair and CEO should be separated and, for example,
specify a “cooling-off period” before a retiring CEO can become a chair.
Others are much less prescriptive on such separation. In some codes
what represents “independence” is spelled out (for example, the United
Kingdom's code gives a list of criteria2). In other codes what is meant by the term is left much vaguer.

I
had also thought that it was likely that we would find that the content
of codes was heavily influenced by the composition of the committees
that produced them. For example, I thought we might find that codes
produced by committees with significant representation from investors
would be more onerous and prescriptive than the content of codes
produced by other groups. In fact, I found no correlation between
composition of code-authoring committees and the code content.

However,
I did find clear differences between different countries when grouped
by legal families. By “legal families” I mean groups of countries that
operate in accordance with different legal frameworks such as English
Common Law, the Civil and Commercial Codes of France, or the German or
Scandinavian systems. I also found differences related to the nature of
typical corporate ownership—concentrated or dispersed, relative
proportions of foreign and institutional investors.

Furthermore, I
found that regulatory reform in corporate governance is significantly
influenced by changes to international benchmark models of good
governance.

It is remarkable that, although the probability of one
country adopting a particular regulatory mechanism in a corporate
governance code increases the more other countries have adopted a
similar term, the amount of legal variance between European countries'
corporate governance regimes has not significantly diminished. So in
spite of much cross-border legal learning, the convergence of corporate
governance regimes, defined formally as the lower variance of legal
variables over time, has not yet occurred in Europe.

Caroline: How influential are corporate governance codes on practice?

Carsten:
My research did not cover this, but certainly the number of codes is
increasing around the world. The European Corporate Governance
Institute's (ECGI) website3
makes available the full texts of corporate governance codes,
principles of corporate governance, and corporate governance reforms
both in Europe and elsewhere.

The United States does not have one
major recognized corporate governance code, although they do have the
New York Stock Exchange listing rules. Generally, the United States
operates in a more rules-based manner when it comes to corporate
governance and accounting. Codes tend to be more influential in other
parts of the world where guidance based on principles is the preferred
approach.

There is evidence that the compliance rate with the UK
Corporate Governance code is very good when compared with that of other
countries. We do know, from an annual survey of compliance by FTSE 350
companies carried out by Grant Thornton,4
that, in 2014, 94 percent of companies complied with all but one or two
of the Code's 54 provisions, while 61 percent reported full compliance
with the Code—an increase of 4 percent over 2013.

On the other
hand, the relationship between high rates of compliance with corporate
governance codes and firm performance is still unclear. And that link is
never going to be easy to identify given the difficulty of separating
out all the other factors that influence performance. However, there is
some evidence showing an association between compliance with corporate
governance codes and the proper functioning of certain corporate
governance mechanisms within firms, such as compliance with disclosure
regulation.

Caroline: Do you have any opinions or questions about the validity of the determinants of corporate governance codes that you found?

Carsten:
It is heartening to find that, holding all other factors constant,
group politics—one group trying to create corporate governance norms to
advantage their interests over others' interests—is not what seems to be
happening.

What does seem to be happening, holding all other
factors constant, is that the more countries that have adopted a
particular code provision, the more likely that other countries will
adopt the same provision when introducing or revising their codes.
Therefore, what seems to be important to authoring committees is what
are the common perceptions in the wider world beyond themselves about
what good corporate governance is and isn't.

Corporate governance
codes therefore seem to be seen as important signals of best practice.
Corporations in every country want to send out signals that they are
well governed—good places to do business—and having corporate governance
codes that measure up to those of other respected jurisdictions is one
way of doing this.

One example of this in action is that the whole
idea of “independent directors,” which was originally proposed by the
Cadbury Committee,5
which created the very first national corporate governance code in
1992, now appears in nearly all codes. Another example is that one often
finds code provisions that seem to have been copied from another code
almost word for word.

It is as if everyone is measuring themselves
against an internationally emerging standard—code authors think they
need to do the same as everybody else in order not to be seen as
substandard. It is a different question whether the drafting committee
believes what they are calling for improves performance or is well
aligned with the domestic legal and/or economic environment, but they
seem to feel obliged to meet what is seen as a common standard.

This
could be used to say that good corporate governance is more a matter of
“groupthink” than anything else, but I will leave that for readers of Board Leadership and others to discuss.

Ever wondered how those corporate governance codes, from which so much
governance practice is derived, come about? A few months ago, Board Leadership's
editor, Caroline Oliver, came across Working Paper Number 5 in the
London School of Economics' “Law Society and Economy” Series on
“Determinants of Corporate Governance Codes.”1 She tracked down its author, Carsten Gerner-Beuerle, and asked him a few questions. …